Is CoVid-19 the Cure for Sick Services?

Long before CoVid19, services have been sick. Productivity was low because the adoption of new technologies was sluggish. Are services make up a large part of the economy, this is dragging down growth across the board.

However, since services are particularly strong hit by CoVid, digitalization is being put on steroids – helping long run productivity and the recovery. The link between digitalization and the future of services after Covid19 is in the spotlight of a recent virtual roundtable with the BFNA and a new GED study.

Why Productivity Matters and Why Services Are the Problem

Most advanced economies have a productivity problem. Despite new technologies and digitalization – which anyone would expect to contribute to enhanced productivity – productivity has remained stubbornly low. One explanation for this pattern is the high share of services – in most OECD countries they contribute about 80 per cent of value added to GDP.

For a long time, it seemed that increasing the productivity of services is really difficult because they were performed by human beings the only way to increase the productivity of a human service provider. Which can be difficult if you think of – say – a lawyer who can only deal with a set of clients in a given time. But digitalization is possibly a game changer: many services can be rendered more productive through digitalization.

In the lawyer example, this can be through the use of digital exchanges with clients and other lawyers which can be more efficient than physical meetings. Or, to pick a more advanced example, legal AI might even be able to do part of the contract drafting which just needs to be supervised.

The new study, for which GED has partnered with ECIPE, looks in a first step whether more digital services are indeed more productive. It confirms the initial hypothesis, that more digital services are more productive than less digital ones.

In a second step, it looks at drivers of this productivity growth – more sectors with more competition digitalise quicker.

Access the full study here

Productivity really matters. Most European countries, in particular Germany, have rapidly ageing populations which implies a smaller workforce. Less workers produce less.

There is thus a risk, that an ageing economy is also a smaller economy. Unless rises in productivity compensate for the loss of workforce. Digitalisation can help to enhance productivity and close this gap.

Why CoVid19 has good consequences for services digitalization

The problem for digitalization in the services industry was a double gap: consumers did not demand much digital services and firms didn’t provide many. Much of this is due to a skills gap in the society. For all its terrible consequences, CoVid19 here actually may have had a positive impact.

As going digital was for many businesses the only way to stay operational during the lockdown, they rapidly digitalized. Similar for consumers: consuming digital rather than physical services was a good way to stay safe. CoVid19 is very likely to have shaken the path dependency that prevented further digitalization of the services sector.

Will this last? Or will old habits return once the health crisis is over? How much digitalization will be part of the economic recovery strategies of Europe and other countries? What does this mean for development strategies of emerging economies?

These questions and many more where in the focus of a webinar with the BFNA in which the following panelists discussed the future of digitalization post-CoVid19:

Tania Begazo
Senior Economist, Digital Development Global Practice
World Bank

Christian Bluth
Project Manager
Bertelsmann Stiftung

Felipe Buitrago
Vice Minister of the Creative Economy
Colombia

Catherine Tucker
Sloan Distinguished Professor of Management Science
Massachusetts Institute of Technology (MIT)